Foreign Dividends & Income Tax and is it Taxable for U.S. Persons?

Foreign Dividends & Income Tax and is it Taxable for U.S. Persons?

IRS Tax Treatment of Foreign Dividends for U.S. Persons

Foreign Dividends & U.S. Income Tax: In general, the United States taxes U.S. persons on their worldwide income — and the United States has very complex tax rules involving the IRS treatment of foreign income. Unlike many foreign countries in which dividend income is either tax-free or tax-exempt — the United States taxes foreign income, although the tax rate may be reduced if it meets certain requirements (Qualified Dividends or Long-Term Capital Gain). The international tax rules are compounded significantly when they involve foreign investment income, such as dividends — especially because the PFIC (Passive Foreign Investment Company) rules may kick in.  And, when a person does not include this income on the tax return, they have unreported income, which can lead to other issues as well. And, with the IRS taking an aggressive position on matters involving foreign accounts compliance, it is important to try and stay compliant.

Are Foreign Dividends Taxable in the U.S.?

Yes, from a baseline perspective, foreign dividend income earned by a U.S. Person is taxable by the United States. That is because U.S. Taxpayers are taxed on their worldwide income, which includes passive income such as dividends, interest, and capital gains earnings.

Tax-Exempt in a Foreign Country

Not all countries tax dividend income, or if they do, it is taxed at a very reduced tax rate — and only in certain situations. For example, there are some countries such as Singapore or Hong Kong, where dividend income is typically tax-free. Unfortunately, from the IRS’ perspective, the IRS does not care if the money is non-taxable dividend income in a foreign country. For example, even though the dividend income you earn in Hong Kong is not taxable in Hong Kong, it must be included on your US tax returns. If you earn foreign dividend income in a country in which you pay U.S. Tax, you are entitled to a Foreign Tax Credit. Otherwise, the income is combined with your other worldwide income — to determine your progressive tax rate on your US tax return.

Can I use the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion does not apply to dividend income because dividend income is passive income and the earned income exclusion that qualifies for the exclusion is earned from Employment, Personal Services, etc.

What if You Did Not Receive a 1099?

If the foreign country’s institution did not provide you with any paperwork regarding the dividend income, unfortunately, you are still required to include the information on your tax return. In other words, the fact that you did not receive a 1099 or equivalent will not exempt you from including it in the information on your US taxes.

Is the Foreign Dividend a Qualified Dividend?

Not all foreign dividends are qualified. In order for a foreign dividend to be qualified, it has to meet certain threshold requirements to assess whether it meets the minimum basic requirements for qualified dividend status.

Generally, the foreign dividend must meet any of the following requirements (brief summary):

      • The Corporation is incorporated in a U.S. Possession

      •  The Corporation is eligible for benefits by way of a U.S. Income Tax Treaty

      • If the stock is readily tradable on an established securities market in the U.S. (or a National Securities Exchange registered under Section Six of the Securities Exchange Act of 1934 or NASDAQ Stock Market.)

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely report their foreign passive income and file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.